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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-23 · 255 added, 284 removed, 281 unchanged (66% of the section changed)

Management's Discussion and Analysis of Results of Operations and Financial Condition

RESULTS OF OPERATIONS

(Tables present dollars in millions, except per-share data)

Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated company.

Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to our company's results of operations and financial position.

This discussion and analysis should be read in conjunction with Item 8, "Financial Statements and Supplementary Data." Certain statements in this Item 7 constitute forward-looking statements.

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EXECUTIVE OVERVIEW

This section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry.

Earnings per share (EPS) data are presented on a diluted basis.

COVID-19 Pandemic

In response to the COVID-19 pandemic, we have focused on maintaining a supply of our medicines;

reducing the strain on the medical system;

developing treatments for COVID-19;

protecting the health, safety, and well-being of our employees;

supporting our communities;

and ensuring affordability of and access to our medicines, particularly insulin.

As part of our response to the COVID-19 pandemic, and at the request of the United States (U.S.) and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world.

Food and Drug Administration (FDA) granted Emergency Use Authorizations (EUA) for bamlanivimab and etesevimab administered together for higher-risk patients who have been recently diagnosed with mild-to-moderate COVID-19 and for baricitinib for treatment with or without remdesivir in hospitalized COVID-19 patients.

In the third quarter of 2021, the FDA expanded the EUA for bamlanivimab and etesevimab administered together to include post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection.

We expect that additional revenue from the sale of bamlanivimab and etesevimab after the first quarter of 2022 will be limited.

In February 2022, the FDA granted an EUA for bebtelovimab for certain high-risk patients who have been recently diagnosed with mild-to-moderate COVID-19.

We have agreed with the U.S.

government to supply up to 600,000 doses of bebtelovimab no later than March 31, 2022 for at least $720 million with an option of 500,000 additional doses no later than July 31, 2022.

The FDA has revised, and may in the future revise, any EUA for our COVID-19 therapies in response to the prevalence of variants against which our therapies have varying degrees of efficacy.

The COVID-19 pandemic has, and may continue to, adversely impact our business and operations.

The focus of resources on COVID-19, widespread protective measures implemented to control the spread of COVID-19, and the resulting strain on global transportation, manufacturing, and labor markets have negatively impacted development, manufacturing, supply, distribution, and sales of our medicines.

In addition to decreases in new prescriptions, changes in payer segment mix, and the increased use of patient affordability programs in the U.S., we have experienced, and may continue to experience if the COVID-19 pandemic undergoes resurgent or more severe waves, decreased demand as a result of lack of "normal" access and fewer in-person interactions by patients and our employees with healthcare professionals.

We also face risks and uncertainties related to our COVID-19 therapies, including heightened regulatory scrutiny of our manufacturing practices, quality assurance, and similar regulations, restrictions on administration that limit widespread and timely access to our therapies, and risks related to handling, return, and/or refund of product after delivery by us.

The availability of superior or competitive therapies, including therapies that can be administered more easily, or preventative measures such as vaccines, coupled with the unpredictable nature of pandemics, have and could further negatively impact or eliminate demand for our COVID-19 therapies.

Mutations or the spread of other variants of the coronavirus have in some cases impacted the effectiveness of our COVID-19 therapies, and may further render our therapies more or less effective or ineffective.

The strain on global transportation, logistics, and labor markets caused by the COVID-19 pandemic and an increase in overall demand in our industry for certain materials resulting in changed buying patterns and constrained supply have had, and may continue to have, a number of impacts on our business, including increased costs to provide a consistent supply of our medicines where they are needed and potential disruptions in the supply of our medications.

These factors may negatively affect our results of operations.

It remains difficult to reasonably assess or predict the full extent of the ongoing impact of the COVID-19 pandemic on us.

The degree to which the COVID-19 pandemic continues to affect us will depend on developments that are highly uncertain and beyond our knowledge or control.

We are currently unable to predict the full extent to which the COVID-19 pandemic or any future pandemic, epidemic or similar public health threat will adversely impact our business and operations in the future.

See Item 1A, "Risk Factors" for additional information on risk factors that could impact our business and operations.

This section provides an overview of our financial results, late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry.

Financial Results

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Gross margin as a percent of revenue 76.8 % 74.2 %

Operating expenses $ 13,457.5 $ 12,206.9 10

Acquired in-process research and development 874.9 660.4 32

Asset impairment, restructuring, and other special charges 316.1 131.2 NM

Other—net, (income) expense 201.6 (1,171.9) NM

Income before income taxes 6,155.5 7,229.9 (15)

Income taxes 573.8 1,036.2 (45)

Research and development $ 7,190.8 $ 6,930.7 4

Marketing, selling, and administrative 6,440.4 6,431.6 —

Acquired in-process research and development (IPR&D) and development milestones 908.5 970.1 (6)

Asset impairment, restructuring, and other special charges 244.6 316.1 (23)

Other—net, (income) expense 320.9 201.6 59

Net income 6,244.8 5,581.7 12

EPS 6.12 6.79 (10)

NM - not meaningful

Revenue increased in 2021 driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices.

Operating expenses, defined as the sum of research and development and marketing, selling, and administrative expenses, increased in 2021, driven primarily by higher development expenses for late-stage assets.

The decreases in net income and EPS in 2021 were driven primarily by reduction in other-net, (income) expense and higher operating expenses, partially offset by higher gross margin.

Earnings per share - diluted 6.90 6.12 13

Revenue increased in 2022 driven by increased volume, largely offset by lower realized prices and the unfavorable impact of foreign exchange rates.

Research and development expenses increased in 2022, driven primarily by higher development expenses for late-stage assets, partially offset by lower development expenses for COVID-19 antibodies and the favorable impact of foreign exchange rates.

Marketing, selling, and administrative expenses in 2022 remained relatively flat compared to 2021 as increased costs associated with launches of new products and indications were offset by the favorable impact of foreign exchange rates.

The following highlighted items affect comparisons of our 2022 and 2021 financial results:

Acquired IPR&D and Development Milestones (Note 3 to the consolidated financial statements)

• We recognized $908.5 million of acquired IPR&D and development milestones that included the buy-out of substantially all future obligations that were contingent upon the occurrence of certain events linked to the success of our mutant-selective PI3kα inhibitor and a purchase of a Priority Review Voucher.

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

• We recognized charges of $244.6 million primarily related to an intangible asset impairment for GBA1 Gene Therapy (PR001) due to changes in estimated launch timing.

Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)

• We recognized $410.7 million of net investment losses on equity securities.

Cost of Sales (See Note 6 to the consolidated financial statements)

• We recognized a net inventory impairment charge related to our COVID-19 antibodies of $339.7 million.

As part of our response to the COVID-19 pandemic, and at the request of the U.S.

and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world.

As the COVID-19 pandemic evolved during 2021, we incurred a net inventory impairment charge primarily due to the combination of changes to current and forecasted demand from U.S.

As the COVID-19 pandemic evolved during 2021, we incurred a net inventory impairment charge primarily due to the combination of changes to demand from U.S.

and international governments, including changes to our agreement with the U.S.

government, and near-term expiry dates of COVID-19 antibodies.

Acquired In-Process Research and Development (IPR&D) (Note 3 to the consolidated financial statements)

• We recognized acquired IPR&D charges of $874.9 million related to business development transactions.

Acquired IPR&D and Development Milestones (Note 3 to the consolidated financial statements)

• We recognized $970.1 million of acquired IPR&D and development milestones that included charges resulting from business development transactions with Foghorn Therapeutics Inc.

(Foghorn), Rigel Pharmaceuticals, Inc.

(Rigel), and Precision Biosciences, Inc.

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

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• We recognized $176.9 million of net investment gains on equity securities.

Acquired IPR&D (Note 3 to the consolidated financial statements)

• We recognized acquired IPR&D charges of $660.4 million related to business development transactions.

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

• We recognized charges of $131.2 million primarily related to severance costs incurred as a result of actions taken worldwide to reduce our cost structure.

Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)

• We recognized $1.44 billion of net investment gains on equity securities.

Late-Stage Pipeline

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We currently have approximately 45 new medicine candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase.

The following certain new molecular entities (NMEs) are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review in the U.S., Europe, or Japan.

The following table reflects the status of certain NMEs, including certain other developments since our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.

The following certain new molecular entities (NMEs) are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review or have received regulatory approval in the U.S., Europe, or Japan.

The following table reflects the status of certain NMEs, including certain other developments, up to the time of the filing of this Annual Report on Form 10-K:

Compound Indication Status Developments

COVID-19 Antibodies

Bebtelovimab (LY-CoV1404) COVID-19 Emergency Use Authorization

The FDA granted EUA for certain high-risk patients recently diagnosed with mild-to-moderate COVID-19 in February 2022.

Tirzepatide Type 2 diabetes Submitted Submitted in the U.S.

using a priority review voucher and in Europe and Japan in 2021.

Heart failure with preserved ejection fraction Phase III Phase III trials are ongoing.

Nonalcoholic steatohepatitis Phase II Phase II trial is ongoing.

Basal Insulin-Fc Type 1 and 2 diabetes Phase II Phase II trials are ongoing.

GGG Tri-Agonist Obesity Phase II Phase II trials are ongoing.

Basal Insulin-Fc Type 1 and 2 diabetes Phase III Phase III trials initiated in 2022 and 2023.

ANGPTL3 siRNA Cardiovascular disease Phase II Phase II trial initiated in 2022.

LP(a) Inhibitor Cardiovascular disease Phase II Phase II trial initiated in 2022.

LP(a) siRNA Cardiovascular disease Phase II Phase II trial initiated in 2022.

Orforglipron Obesity Phase II Phase II trials were recently completed.

Type 2 diabetes

GLP-1R NPA Obesity Phase II Phase II trials are ongoing.

Retatrutide Obesity Phase II Phase II trials were recently completed.

Type 2 diabetes

Lebrikizumab (1)

Atopic dermatitis Phase III Granted FDA Fast Track designation (2) .

Announced in 2021 that Phase III trials met primary and all key secondary endpoints.

Atopic dermatitis Submitted Submitted in the U.S.

and Europe in 2022.

Phase III trials are ongoing.

Mirikizumab Crohn's Disease Phase III Phase III trials are ongoing.

Ulcerative colitis Announced in 2021 that Phase III trials met primary and all key secondary endpoints.

Mirikizumab Ulcerative colitis Submitted Submitted in the U.S., Europe, and Japan in 2022.

Crohn's Disease Phase III Phase III trials are ongoing.

BTLA MAB Agonist Systemic lupus erythematosus Phase II Phase II trial initiated in 2022.

CXCR1/2 Ligands Monoclonal Antibody Hidradenitis suppurativa Phase II Phase II trial is ongoing.

IL-2 Conjugate Systemic lupus erythematosus Phase II Phase II trials are ongoing.

Ulcerative colitis

PD-1 MAB Agonist Rheumatoid arthritis Phase II Phase II trial is ongoing.

Peresolimab Rheumatoid arthritis Phase II Phase II trial is ongoing.

Rezpegaldesleukin Systemic lupus erythematosus Phase II Phase II trial is ongoing.

Compound Indication Status Developments

Donanemab Early Alzheimer's disease Submission initiated Granted FDA Breakthrough Therapy designation (3) .

Initiated a rolling submission in the U.S.

for accelerated approval in 2021.

Donanemab Early Alzheimer's disease Complete Response Letter Granted U.S.

Food and Drug Administration (FDA) Breakthrough Therapy designation (2) .

Submitted in the U.S.

in 2022 under the accelerated approval pathway.

In January 2023, the FDA issued a complete response letter for the accelerated approval submission.

Phase III trials are ongoing.

Preclinical Alzheimer's disease Phase III Phase III trial is ongoing.

Remternetug Early Alzheimer's disease Phase III Phase III trial initiated in 2022.

Solanezumab Preclinical Alzheimer's disease Phase III Phase III trial is ongoing.

Epiregulin/TGFα MAB Chronic pain Phase II Phase II trials are ongoing.

GBA1 Gene Therapy (PR001) Parkinson's disease Phase II Acquired in the Prevail acquisition in 2021.

Granted FDA Fast Track designation (2) .

Phase II trials are ongoing.

GRN Gene Therapy (PR006) Frontotemporal dementia Phase II

O-glc-NAcase Alzheimer's disease Phase II Phase II trial initiated in the fourth quarter of 2021.

PACAP38 Antibody Chronic pain Phase II Phase II trial is ongoing.

SSTR4 Agonist Chronic pain Phase II Phase II trials are ongoing.

GBA1 Gene Therapy (PR001) Parkinson's disease Phase II Granted FDA Fast Track designation (3) .

Phase II trial is ongoing.

GRN Gene Therapy (PR006) Frontotemporal dementia Phase II Granted FDA Fast Track designation (3) .

Phase II trial is ongoing.

O-GlcNAcase Inh Alzheimer's disease Phase II Phase II trial is ongoing.

P2X7 Inhibitor Pain Phase II Phase II trials initiated in 2022.

SSTR4 Agonist Pain Phase II Phase II trials are ongoing.

TRPA1 Antagonist Pain Phase II Phase II trials are ongoing.

Pirtobrutinib

(Jaypirca TM )

Mantle cell lymphoma Approved (4)

FDA granted accelerated approval (4) in the U.S.

in January 2023.

Phase III trial is ongoing.

Chronic lymphocytic leukemia Phase III Phase III trials are ongoing.

B-cell malignancies Phase II Phase II trial is ongoing.

Selpercatinib (Retevmo ® )

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Phase III trials are ongoing.

Thyroid cancer

Sintilimab injection (5)

Lung cancer Submitted In February 2022, the Oncologic Drugs Advisory Committee recommended that the FDA require additional clinical trials prior to a final regulatory decision.

Pirtobrutinib (LOXO-305) Mantle cell lymphoma Submission initiated Initiated a rolling submission in the U.S.

for accelerated approval in the fourth quarter of 2021.

Phase II and Phase III trials are ongoing.

Chronic lymphocytic leukemia Phase III Phase III trials are ongoing.

B-cell malignancies Phase II Phase II trial is ongoing.

Imlunestrant ER+HER2- metastatic breast cancer Phase III Phase III trial is ongoing.

Thyroid cancer Approved (4)

Phase III trial is ongoing.

Imlunestrant Adjuvant Breast Cancer Phase III Phase III trial initiated in 2022.

ER+HER2- metastatic breast cancer Phase III Phase III trial is ongoing.

(1) In collaboration with Almirall, S.A.

(2) Fast Track designation is designed to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs.

(2) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint.

(3) Fast Track designation is designed to facilitate the development and expedite the review of medicines to treat serious conditions and fill an unmet medical need.

(4) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase III trials.

(5) In collaboration with Innovent Biologics, Inc.

Our pipeline also contains several new indication line extension (NILEX) products.

The following certain NILEX products for use in the indication described are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review in the U.S., Europe, or Japan.

The following table reflects the status of certain NILEX products, including certain other developments since our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021:

The following certain NILEX products for use in the indication described are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review or have received regulatory approval in the U.S., Europe, or Japan.

The following table reflects the status of certain NILEX products, including certain other developments, up to the time of the filing of this Annual Report on Form 10-K:

Compound Indication Status Developments

Empagliflozin (Jardiance ® ) (1)

Heart failure with preserved ejection fraction Submitted Granted FDA Breakthrough Therapy designation (2) and FDA Fast Track designation (3) .

Chronic kidney disease Submitted Granted FDA Fast Track designation (2) .

Submitted in the U.S.

and Europe in 2021 and in Japan in January 2022.

The FDA granted priority review for adults with heart failure independent of left ventricular ejection fraction.

Chronic kidney disease Phase III Granted FDA Fast Track designation (3) .

and Europe in January 2023.

Tirzepatide (Mounjaro ® )

Obesity Submission initiated Granted FDA Fast Track designation (2) in 2022.

Initiated a rolling submission in the U.S.

Phase III trials are ongoing.

Baricitinib (Olumiant ® )

COVID-19 Emergency Use Authorization (4)

Submitted in the U.S.

and the FDA granted priority review in January 2022.

Alopecia areata Submitted Granted FDA Breakthrough Therapy designation (2) .

Submitted in U.S., Europe and Japan in 2021.

Systemic lupus erythematosus Discontinued Announced in January 2022 that, based on top-line efficacy results from Phase III trials, we discontinued development.

Heart failure with preserved ejection fraction Phase III Phase III trials are ongoing.

Obstructive sleep apnea Phase III Phase III trial initiated in 2022.

Granted FDA Fast Track designation (2) in 2022.

Nonalcoholic steatohepatitis Phase II Phase II trial is ongoing.

Abemaciclib (Verzenio ® )

HR+, HER2- Adjuvant breast cancer Approved Approved in the U.S.

and Japan in the fourth quarter of 2021.

Prostate cancer

Phase III Phase III trial is ongoing.

HR+, HER2+ Adjuvant breast cancer Discontinued Announced in January 2022 that we will discontinue the Phase III trial in response to the changing treatment landscape and global enrollment challenges.

Phase III Phase III trials are ongoing.

(1) In collaboration with Boehringer Ingelheim.

(3) Fast Track designation is designed to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs.

(4) The FDA granted EUA for treatment with or without remdesivir in hospitalized COVID-19 patients.

(2) Fast Track designation is designed to facilitate the development and expedite the review of medicines to treat serious conditions and fill an unmet medical need.

There are many difficulties and uncertainties inherent in pharmaceutical research and development and the introduction of new products, as well as a high rate of failure inherent in new drug discovery and development.

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As a result, most funds invested in research programs will not generate financial returns.

New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others.

New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, the application of pricing controls, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others.

Regulatory agencies establish high hurdles for the efficacy and safety of new products and indications.

Delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity.

In addition, it can be very difficult to predict revenue growth rates of new products and indications.

Delays, uncertainties, unpredictabilities, and inconsistencies in drug approval processes across markets and agencies can result in delays in product launches and lost market opportunity.

In addition, it can be very difficult to predict revenue growth rates of or variability in demand for new products and indications.

We manage research and development spending across our portfolio of potential new medicines.

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We depend on patents or other forms of intellectual property protection for most of our revenue, cash flows, and earnings.

In 2021, our vitamin regimen patents for Alimta ® expired worldwide.

Following the loss of patent exclusivity in major European countries and Japan, we faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels.

In the U.S., we expect pediatric data exclusivity to provide us with protection through May 2022.

However, we and Eagle Pharmaceuticals, Inc.

(Eagle) reached an agreement in December 2019 to settle all pending U.S.

patent litigation, allowing Eagle a limited initial entry into the market with its product starting February 2022 (up to an approximate three-week supply) and subsequent unlimited entry starting April 2022.

We expect that the entry of generic competition in the U.S.

following the loss of exclusivity will cause a rapid and severe decline in revenue and will have a material adverse effect on our consolidated results of operations and cash flows.

See Note 16 to the consolidated financial statements for a more detailed account of the legal proceedings currently pending regarding, among others, our Alimta patents.

Our compound patent for Humalog ® (insulin lispro) has expired in major markets.

Global regulators have different legal pathways to approve similar versions of insulin lispro.

A competitor has similar version of insulin lispro in the U.S.

Following the expiration of patent exclusivity for Alimta ® in Europe and Japan in June 2021, we have faced generic competition that has rapidly and severely eroded revenue from prior levels, and we expect such competition will continue to erode revenues from current levels in these markets.

In addition, as a result of the entry of multiple generics in the U.S.

following the expiration of patent and pediatric exclusivity in the first half of 2022, we began facing, and expect to continue to face, generic competition that has rapidly and severely eroded revenue from prior levels, and we expect will continue to erode revenue from current levels.

This decline in revenue will continue to impact period-over-period financial results comparisons, particularly during the first half of 2023.

See Note 16 to the consolidated financial statements for a description of legal proceedings currently pending regarding certain of our patents.

Our compound patents for Humalog ® (insulin lispro) have expired in the U.S.

and major international markets, and we have also introduced lower-priced versions of Humalog as part of our insulin access and affordability solutions.

A competitor has a similar version of insulin lispro in the U.S.

and in certain European markets.

While it is difficult to estimate the severity of the impact of insulin lispro products entering the market, we do not expect and have not experienced a rapid and severe decline in revenue;

however, we expect additional pricing pressure and some loss of market share that may continue over time.

Our formulation and use patents for Forteo ® have expired in major markets.

We expect further decline in revenue as a result of the entry of generic and biosimilar competition due to the loss of patent exclusivity in major markets.

Our regulatory data and patent exclusivity for Cymbalta ® expired in Japan.

Beginning in mid-2021, we have faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels.

Foreign Currency Exchange Rates

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S.

dollar against the euro, Japanese yen, and Chinese yuan.

While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on operating expenses.

While there is uncertainty in the future movements in foreign exchange rates, fluctuations in these rates could adversely impact our future consolidated results of operations and cash flows.

Due to the impact of competition and pricing pressure in the U.S.

and certain international markets, we expect that lower revenue for Humalog due to realized price decline will continue over time.

Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access

Global concern over access to and affordability of pharmaceutical products continues to drive regulatory and legislative debate, as well as worldwide cost containment efforts by governmental authorities.

Such measures may include the use of mandated discounts, price reporting requirements, mandated reference prices, restrictive formularies, changes to available intellectual property protections, as well as other efforts.

In addition, consolidation of private payors in the U.S.

has significantly impacted the market for pharmaceuticals by increasing payor leverage in negotiating manufacturer price concessions and pharmacy reimbursement rates.

Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, or private payers, such as the recently proposed Alzheimer’s Monoclonal Antibody national coverage determination, may adversely impact our business and financial results.

Reforms, including those that may stem from periods of economic downturn or uncertainty, or as a result of high inflation, emergence or escalation of, and responses to, war or unrest (including the Russia-Ukraine war), or government budgeting priorities (including as exacerbated by the COVID-19 pandemic), may continue to result in added pressure on pricing and reimbursement for our products.

Global concern over access to and affordability of pharmaceutical products continues to drive regulatory and legislative debate and action, as well as worldwide cost containment efforts by governmental authorities.

Such measures include the use of mandated discounts, price reporting requirements, mandated reference prices, restrictive formularies, changes to available intellectual property protections, as well as other efforts.

In August 2022, the U.S.

government enacted the Inflation Reduction Act of 2022 (IRA).

Among other measures, the IRA will require the U.S.

Department of Health and Human Services to effectively set prices for certain single-source drugs and biologics reimbursed under Medicare Part B and Part D.

Generally, these government prices apply nine (medicines approved under a New Drug Application) or thirteen (medicines approved under a Biologics License Application) years following initial FDA approval and will be capped at a statutory ceiling price that is likely to represent a significant discount from average prices to wholesalers and direct purchasers.

It is too soon to tell how the U.S.

government will set these prices as the law specifies a ceiling price, but not a minimum or floor price.

One or more of our significant products may be selected, which would have the effect of accelerating revenue erosion prior to patent expiry.

The effect of reducing prices and reimbursement for certain of our products would significantly impact our business and consolidated results of operations.

The establishment of payment limits or other restrictions by drug affordability review boards and other state level actors would similarly impact us.

Other IRA provisions provide for rebate obligations on drug manufacturers that increase prices of Medicare Part B and Part D medicines at a rate greater than the rate of inflation and Part D benefit redesign that includes replacing the Part D coverage gap discount program with a new manufacturer discounting program.

Manufacturers that fail to comply with the IRA may be subject to various penalties, including civil monetary penalties, which could be significant.

The IRA takes effect progressively starting in 2023, with the first government-set prices effective in 2026.

The IRA may meaningfully influence our business strategies and those of our competitors.

In particular, the nine-year timeline to set prices for medicines approved under a new drug application may reduce the attractiveness of investment in small molecule innovation.

The implications to us of a competitor's product being selected for price setting are also uncertain.

Provisions of the IRA may be subject to legal challenges or other reformation, and the full impact of the IRA on our business and the pharmaceutical industry remains uncertain.

Additional policies, regulations, legislation, or enforcement, including those proposed and/or pursued by the U.S.

Congress, the current U.S.

presidential administration, and regulatory authorities worldwide, could adversely impact our business and consolidated results of operations.

Consolidation and integration of private payors and pharmacy benefit managers in the U.S.

has also significantly impacted the market for pharmaceuticals by increasing payor leverage in negotiating manufacturer price or rebate concessions and pharmacy reimbursement rates.

Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, courts, or private payers, such as the Centers for Medicare & Medicaid Services' national coverage determination for monoclonal antibodies for the treatment of Alzheimer's Disease, may adversely impact our business and consolidated results of operations.

We expect that these actions may intensify and could particularly affect certain products, such as insulin, as governments manage and emerge from the COVID-19 pandemic, which could adversely affect our business.

In addition, we are engaged in litigation and investigations related to our 340B program that, if resolved adversely to us, could negatively impact our business and consolidated results of operations.

In addition, we are engaged in litigation and investigations related to our 340B program and access to insulin that, if resolved adversely to us, could negatively impact our business and consolidated results of operations.

It is not currently possible to predict the overall potential adverse impact to us or the general pharmaceutical industry of continued cost containment efforts worldwide.

In addition, evolving regulatory priorities have intensified governmental scrutiny of our operations and our industry, including with respect to current Good Manufacturing Practices, quality assurance, and similar regulations, and increased focus on business combinations in our industry.

Any regulatory issues concerning these matters could lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in the approvals of new products or supplemental approvals of current products pending resolution of the issues, impediments to the completion of business combinations, and reputational harm, any of which would adversely affect our business.

In addition, regulatory issues concerning compliance with current Good Manufacturing Practices, quality assurance, evolving standards, and increased scrutiny around excipients and potential impurities such as nitrosamines, and similar regulations and standards (and comparable foreign regulations and standards) for our products can lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in new product approvals or line extensions or supplemental approvals of current products pending resolution of the issues, and reputational harm, any of which would adversely affect our business.

Moreover, increased focus on business combinations across industries and jurisdictions can lead to impediments to the completion of business combinations.

See Item 1, "Business—Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access" and Note 16 to the consolidated financial statements for additional information.

Product Supply

We have faced challenges, and expect to continue to face challenges, meeting strong demand for our incretin products, including due to the limited and fluctuating availability of competitor therapies.

In the U.S., given very strong uptake of Mounjaro following its launch in the U.S.

for type 2 diabetes in the second quarter of 2022, and as demand for Trulicity ® has remained strong, we have experienced intermittent delays in fulfilling certain U.S.

orders for these products.

Outside the U.S., we have implemented certain actions to minimize the impact on existing Trulicity patients, but we expect to continue to experience intermittent disruptions in our supply of Trulicity in international markets.

We anticipate tight supplies of our incretin products will persist until additional manufacturing capacity is operationalized.

We expect additional internal and contracted manufacturing capacity will become fully operational around the world in the next several years, with significant expansion in 2023, as part of our ongoing efforts to meet the significant demand for our incretin medicines.

We are subject to income taxes and various other taxes in the U.S.

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In 2017, the U.S.

enacted the Tax Cuts and Jobs Act (the 2017 Tax Act), which contains a provision that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022.

enacted the Tax Cuts and Jobs Act (the 2017 Tax Act), which contained a provision that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022.

Previously, these expenses could be deducted in the year incurred.

While this provision of the 2017 Tax Act is expected to have an immaterial impact on our consolidated results of operations, if it is not deferred or repealed by Congress, we expect that the implementation of this provision will increase our cash payments of income taxes by up to $1.50 billion in 2022 and subsequently decrease our cash payments of income taxes moderately over the five-year amortization period.

and countries around the world are actively considering and enacting tax law changes.

Tax proposals introduced by Congress and the U.S.

presidential administration contain significant changes, including increases to the tax rates at which both domestic and foreign income of U.S.

companies would be taxed.

In addition, tax authorities in the U.S.

and other jurisdictions in which we do business routinely examine our tax returns and are intensifying their scrutiny and examinations of profit allocations among jurisdictions, which could adversely impact our future consolidated results of operations and cash flows.

The implementation of this provision increased our cash payments of income taxes by approximately $1.20 billion in 2022.

While the implementation of this provision will continue to increase our cash payments of income taxes, the increase will moderately decrease from 2022 levels over the five-year amortization period.

and countries around the world are actively proposing and enacting tax law changes.

Further, actions taken with respect to tax-related matters by associations such as the Organisation for Economic Co-operation and Development and the European Commission could influence tax laws in countries in which we operate.

We opportunistically invest in external research and technologies that we believe complement and strengthen our own efforts.

Tax authorities in the U.S.

and other jurisdictions in which we do business routinely examine our tax returns and are intensifying their scrutiny and examinations of profit allocations among jurisdictions.

Changes to existing U.S.

and foreign tax laws and increased scrutiny by tax authorities in the U.S.

and other jurisdictions could adversely impact our future consolidated results of operations and cash flows.

Foreign Currency Exchange Rates and Other Impacts

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S.

dollar against the euro, Japanese yen, and Chinese yuan.

During the year ended December 31, 2022, revenue was unfavorably impacted by 3 percent due to foreign exchange rates.

While there is uncertainty in the future movements in foreign exchange rates, fluctuations in these rates have, and we currently expect in the near-term future will, adversely impact our consolidated results of operations and cash flows.

In addition, cost inflation, the strain on global transportation, logistics, and labor markets (including as exacerbated by the COVID-19 pandemic and the emergence or escalation of, and responses to, war or unrest, including the Russia-Ukraine war), global economic downturns or uncertainty, and an increase in overall demand in our industry for certain products and materials have had, and may continue to have, a number of impacts on our business, including increased costs and disruptions in the supply of our medicines.

We invest in external research and technologies that we believe complement and strengthen our own efforts.

These investments can take many forms, including acquisitions, collaborations, investments, and licensing arrangements.

We view our business development activity as a way to enhance our pipeline and strengthen our business.

In January 2021, we acquired all shares of Prevail for a purchase price that included $22.50 per share in cash (or an aggregate of $747.4 million, net of cash acquired) plus one non-tradable contingent value right (CVR) per share.

The CVR entitles Prevail stockholders up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to certain terms and conditions, upon the first regulatory approval of a Prevail product in one of the following countries:

U.S., Japan, United Kingdom, Germany, France, Italy, or Spain.

Under the terms of the agreement, we acquired potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases.

The acquisition establishes a new modality for drug discovery and development, extending our research efforts through the creation of a gene therapy program that is being anchored by Prevail's portfolio of assets.

In February 2020, we acquired all shares of Dermira, Inc.

for a purchase price of $849.3 million, net of cash acquired.

Under the terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis.

Lebrikizumab was granted Fast Track designation from the FDA.

We also acquired Qbrexza cloth, a medicated cloth for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating).

In 2021, we sold the rights to Qbrexza.

See Note 5 to the consolidated financial statements for additional information regarding the sale of the rights to Qbrexza.

In February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired.

Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib, an oral RET inhibitor, and LOXO-305 (pirtobrutinib), an oral BTK inhibitor.

In the second quarter of 2020, the FDA approved selpercatinib (Retevmo) under its Accelerated Approval regulations and continued approval may be contingent upon verification and description of clinical benefit in confirmatory trials.

See Note 3 to the consolidated financial statements for additional information regarding our recent acquisitions.

See Note 3 to the consolidated financial statements for further discussion regarding our recent acquisitions.

COVID-19 Pandemic

As the COVID-19 pandemic evolves, we remain focused on protecting the health, safety, and well-being of our employees;

supporting the medical system and our communities;

and affordability of and access to our medicines.

At the outset of the COVID-19 pandemic, we also focused on researching, developing, and supplying COVID-19 therapies, although we do not currently expect significant further revenue attributable to treatments for COVID-19.

The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business and operations across markets to varying and fluctuating degrees, including as a result of cost inflation and strain on the global transportation, manufacturing, and labor markets, fewer in-person interactions among patients and healthcare providers and our employees with healthcare professionals in certain markets, pricing pressures, rebates, clawbacks, and other changes in reimbursement policies resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare systems, and risks related to our COVID-19 therapies.

The degree to which the COVID-19 pandemic could continue to affect us will depend on developments that are highly uncertain and beyond our knowledge or control.

For additional information, see Item 1A, "Risk Factors—Risk Related to Our Business—Public health outbreaks, epidemics, or pandemics, such as the COVID-19 pandemic, have adversely impacted and may in the future adversely impact our business and operations."

See Item 1A, "Risk Factors" for additional information on risk factors that could impact our business and operations.

RESULTS OF OPERATIONS

Operating Results—2022

The following table summarizes our revenue activity by region:

Year Ended December 31,

2022 2021 Percent Change

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Revenue $ 28,541.4 $ 28,318.4 1

Numbers may not add due to rounding.

The following are components of the change in revenue compared with the prior year:

4 unchanged sentences

Numbers may not add due to rounding.

In the U.S the increase in volume in 2021 was primarily driven by COVID-19 antibodies, Trulicity ® , and Taltz ® .

the increase in volume in 2022 was primarily driven by Trulicity, Verzenio, Jardiance, Mounjaro, and Taltz ® , partially offset by decreased volume for Alimta, following the entry of multiple generics in the first half of 2022.

the decrease in realized prices was primarily driven by Humalog, due to a list price reduction of insulin lispro injection and unfavorable segment mix, and Trulicity and Basaglar ® , due to unfavorable segment mix and higher contracted rebates.

In addition, the decrease in realized prices of Humalog was partially offset by changes to estimates for rebates and discounts in 2021.

Outside the U.S.

the increase in volume in 2021 was primarily driven by Trulicity, Olumiant, COVID-19 antibodies, Verzenio, and Taltz.

the increase in volume in 2022 was primarily driven by Verzenio, Trulicity, Jardiance, Tyvyt ® , and Taltz, partially offset by a decrease in volume due to generic competition for Alimta and Cymbalta ® and decreased utilization of COVID-19 antibodies.

The decrease in realized prices outside the U.S.

was primarily driven by the price impact of the updated National Reimbursement Drug List formulary for certain products, largely Tyvyt ® , in China.

was primarily driven by the impact of government pricing in China from National Reimbursement Drug List (NRDL) formulary for certain products, particularly Tyvyt and Verzenio, and volume-based procurement (VBP) for Humalog.

The following table summarizes our revenue activity in 2022 compared with 2021:

Total Total Percent Change

Year Ended December 31,

2022 2021 Percent Change

Trulicity $ 5,688.8 $ 1,750.9 $ 7,439.7 $ 6,471.9 15

1,320.7 1,132.3 2,453.0 2,625.9 (7)

COVID-19 antibodies (2)

1,978.0 261.4 2,239.3 871.2 NM

Verzenio 1,653.2 830.3 2,483.5 1,349.9 84

Taltz 1,724.6 757.4 2,482.0 2,212.8 12

Alimta 1,233.9 827.5 2,061.4 2,329.9 (12)

Jardiance (1)

1,194.5 871.5 2,066.0 1,490.8 39

Verzenio 834.9 515.0 1,349.9 912.7 48

1,191.9 868.7 2,060.6 2,453.0 (16)

COVID-19 antibodies (3)

2,008.9 14.7 2,023.5 2,239.3 (10)

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351.4 620.0 971.4 1,033.0 (6)

Forteo 441.6 360.3 801.9 1,046.3 (23)

Alimta 543.7 384.0 927.7 2,061.4 (55)

Olumiant ®(4)

148.2 682.3 830.5 1,115.1 (26)

Cymbalta 38.7 542.8 581.5 767.7 (24)

Basaglar 470.7 289.7 760.4 892.5 (15)

462.8 188.1 650.9 577.2 13

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35.2 552.1 587.3 718.4 (18)

Tyvyt — 418.1 418.1 308.7 35

Trajenta ®(5)

500.1 66.4 566.5 548.3 3

Mounjaro 366.6 115.9 482.5 — NM

30.4 306.5 336.9 430.3 (22)

Tyvyt — 293.3 293.3 418.1 (30)

Cymbalta 33.7 249.6 283.3 581.5 (51)

Other products 687.8 974.9 1,662.9 1,700.4 (2)

2 unchanged sentences

NM - Not meaningful

(1) Humalog revenue includes insulin lispro.

(2) COVID-19 antibodies include sales for bamlanivimab administered alone as well as sales for bamlanivimab and etesevimab administered together and were made pursuant to EUAs or similar regulatory authorizations.

(1) Jardiance revenue includes Glyxambi ® , Synjardy ® , and Trijardy ® XR.

(4) Olumiant revenue includes sales for baricitinib, for treatment in hospitalized COVID-19 patients, that were made pursuant to EUA or similar regulatory authorizations.

(5) Trajenta revenue includes Jentadueto ® .

Revenue of Trulicity, a treatment for type 2 diabetes and to reduce the risk of major adverse cardiovascular events in adult patients with type 2 diabetes and established cardiovascular disease or multiple cardiovascular risk factors, increased 28 percent in the U.S., driven by increased demand.

Revenue outside the U.S.

increased 26 percent, driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices.

Revenue of Humalog, an injectable human insulin analog for the treatment of diabetes, decreased 11 percent in the U.S., primarily driven by lower realized prices.

Humalog's lower realized prices in the U.S.

in 2021 were driven by higher contracted rebates and discounts and increased utilization in more highly-rebated government segments, partially offset by lower utilization in the 340B segment.

Revenue outside the U.S.

decreased 1 percent, driven by decreased volume and, to a lesser extent, lower realized prices, largely offset by the favorable impact of foreign exchange rates.

Included in the revenue of Humalog in the U.S.

are our own insulin lispro authorized generics.

While it is difficult to estimate the severity of the impact of similar insulin lispro products entering the market, we do not expect and have not experienced a rapid and severe decline in revenue.

However, due to the impact of competition and due to pricing pressure in the U.S.

and some international markets, we expect some price decline and loss of market share to continue over time.

Revenue of COVID-19 antibodies, treatments for mild to moderate COVID-19 for higher-risk patients and for post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection, was $1.98 billion in the U.S.

during the year ended December 31, 2021.

(2) Humalog revenue includes insulin lispro.

(3) COVID-19 antibodies include sales for bamlanivimab administered alone, for bamlanivimab and etesevimab administered together, and for bebtelovimab and were made pursuant to Emergency Use Authorizations (EUAs) or similar regulatory authorizations.

(4) Olumiant revenue includes sales for baricitinib that were made pursuant to EUA or similar regulatory authorizations.

Revenue of Trulicity increased 16 percent in the U.S., driven by increased demand, partially offset by lower realized prices due to unfavorable segment mix and higher contracted rebates.

Revenue outside the U.S.

was $261.4 million during the year ended December 31, 2021.

The availability of superior or competitive therapies, including therapies that can be administered more easily, or preventative measures, such as vaccines, coupled with the unpredictable nature of pandemics, have and could further negatively impact or eliminate demand for these COVID-19 antibodies.

The FDA has revised, and may in the future revise, any EUA for our COVID-19 antibodies in response to the prevalence of variants against which our antibodies have varying degrees of efficacy.

We expect that additional revenue from the sale of bamlanivimab and etesevimab after the first quarter of 2022 will be limited.

Revenue of Taltz, a treatment for moderate-to-severe plaque psoriasis, active psoriatic arthritis, ankylosing spondylitis, and active non-radiographic axial spondyloarthritis, increased 20 percent in the U.S., driven by increased demand, partially offset by lower realized prices due to increased rebates to gain commercial access.

increased 12 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates and, to a lesser extent, lower realized prices.

We experienced intermittent delays in fulfilling certain U.S.

Trulicity orders during the second half of 2022.

Actions to manage strong demand across our incretin portfolio, including measures to minimize existing patient impact in international markets, also affected volume in 2022.

Revenue of Verzenio increased 98 percent in the U.S., primarily driven by increased demand.

Revenue outside the U.S.

increased 34 percent, primarily driven by increased volume.

Revenue of Alimta, a treatment for various cancers, decreased 2 percent in the U.S., driven by decreased volume, partially offset by higher realized prices.

increased 61 percent, driven by increased demand, partially offset by lower realized prices primarily due to the impact of the NRDL formulary in China and the unfavorable impact of foreign exchange rates.

Revenue of Taltz increased 12 percent in the U.S., driven by increased demand, partially offset by lower realized prices.

Revenue outside the U.S.

decreased 22 percent, primarily driven by decreased volume due to the entry of generic competition in certain markets and, to a lesser extent, lower realized prices, partially offset by the favorable impact of foreign exchange rates.

Following the loss of exclusivity in major European countries and Japan in June 2021, we faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels.

In the U.S., we expect the limited entry of generic competition starting February 2022 and subsequent unlimited entry starting April 2022.

We expect that the entry of generic competition following the loss of exclusivity in the U.S.

will cause a rapid and severe decline in revenue.

See "Executive Overview - Other Matters- Patent Matters" for additional information.

Revenue of Jardiance, a treatment for type 2 diabetes, to reduce the risk of cardiovascular death in adult patients with type 2 diabetes and established cardiovascular disease, and to reduce the risk of cardiovascular death and hospitalization for heart failure in adults with heart failure and reduced ejection fraction, increased 30 percent in the U.S., primarily driven by increased demand.

increased 13 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates and lower realized prices.

Revenue of Jardiance increased 48 percent in the U.S., primarily driven by increased demand.

Revenue outside the U.S.

increased 28 percent, primarily driven by increased volume.

increased 28 percent, primarily driven by increased demand, partially offset by the unfavorable impact of foreign exchange rates.

See Note 4 to the consolidated financial statements for information regarding our collaboration with Boehringer Ingelheim involving Jardiance.

Revenue of Verzenio, a treatment for HR+, HER2- metastatic breast cancer and high risk early breast cancer, increased 35 percent in the U.S., driven by increased demand.

Revenue outside the U.S.

increased 75 percent, driven by increased volume.

Revenue of Humulin, an injectable human insulin for the treatment of diabetes, decreased 4 percent in the U.S., driven by decreased demand and, to a lesser extent, lower realized prices.

Revenue outside the U.S.

decreased 1 percent, driven by decreased volume, largely offset by higher realized prices and the favorable impact of foreign exchange rates.

Revenue of Olumiant, a treatment for adults with moderately-to-severely active rheumatoid arthritis, moderate to severe atopic dermatitis, and of baricitinib, a treatment, with or without remdesivir, of hospitalized patients with COVID-19, increased $260.3 million in the U.S., driven by increased volume and, to a lesser extent, higher realized prices.

Revenue of Humalog decreased 10 percent in the U.S., primarily driven by lower realized prices due to a list price reduction of insulin lispro injection and unfavorable segment mix, partially offset by changes to estimates for rebates and discounts in 2021.

Revenue outside the U.S.

increased 38 percent, driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices.

Increased volume worldwide was partially driven by utilization of Olumiant for the treatment of hospitalized patients with COVID-19.

Revenue of Cyramza, a treatment for various cancers, decreased 6 percent in the U.S., driven by decreased demand, partially offset by higher realized prices.

decreased 23 percent, primarily driven by lower realized prices due to the impact of VBP in China and the unfavorable impact of foreign exchange rates.

Due to the impact of competition and pricing pressure in the U.S.

and certain international markets, we expect that lower revenue for Humalog due to realized price decline will continue over time.

See "—Executive Overview—Other Matters—Patent Matters" for additional information.

Revenue of COVID-19 antibodies was $2.01 billion in the U.S.

during the year ended December 31, 2022, primarily due to bebtelovimab supplied to the U.S.

COVID-19 antibodies are not currently authorized for emergency use in the U.S.

We do not currently expect significant further revenue attributable to the treatment of COVID-19.

Revenue of Alimta decreased 56 percent in the U.S., primarily driven by decreased demand due to the entry of multiple generics in the first half of 2022.

Revenue outside the U.S.

increased 4 percent, driven by increased volume, partially offset by lower realized prices.

decreased 54 percent, primarily driven by decreased demand due to generic competition.

Following the expiration of patent exclusivity for Alimta in Europe and Japan in June 2021, we have faced generic competition that has rapidly and severely eroded revenue from prior levels, and we expect such competition will continue to erode revenues from current levels in these markets.

In addition, as a result of the entry of multiple generics in the U.S.

See "—Executive Overview—Other Matters—Patent Matters" for additional information.

Gross Margin, Costs, and Expenses

Gross margin as a percent of revenue was 74.2 percent in 2021, a decrease of 3.5 percentage points compared with 2020, driven by higher sales of COVID-19 antibodies.

Research and development expenses increased 15 percent to $7.03 billion in 2021, primarily driven by higher development expenses for late-stage assets.

Marketing, selling, and administrative expenses increased 5 percent to $6.43 billion in 2021, primarily due to increased marketing costs to continue to drive growth for certain products, investment in preparation for new launches, and lower marketing activities in 2020 as a result of pandemic-related spending reductions.

We recognized acquired IPR&D charges of $874.9 million and $660.4 million in 2021 and 2020, respectively, related to business development transactions.

Gross margin as a percent of revenue was 76.8 percent in 2022, an increase of 2.6 percentage points compared with 2021, primarily driven by a net inventory impairment charge related to our COVID-19 antibodies recognized in 2021 and the unfavorable effect of foreign exchange rates on international inventories sold in 2021.

Additionally, in 2022, favorable product mix, including the impact of lower sales of COVID-19 antibodies and Olumiant for the treatment of COVID-19, were offset by lower realized prices and increased expenses due to inflation and logistics costs.

Research and development expenses increased 4 percent to $7.19 billion in 2022, driven primarily by higher development expenses for late-stage assets, partially offset by lower development expenses for COVID-19 antibodies and the favorable impact of foreign exchange rates.

Marketing, selling, and administrative expenses remained relatively flat at $6.44 billion in 2022, as increased costs associated with launches of new products and indications were offset by the favorable impact of foreign exchange rates.

We have undertaken compensatory actions to improve retention and address wage inflation, which will increase compensation costs and impact our consolidated results of operations.

We recognized acquired IPR&D and development milestones of $908.5 million in 2022 that included the buy-out of substantially all future obligations that were contingent upon the occurrence of certain events linked to the success of our mutant-selective PI3kα inhibitor and a purchase of a Priority Review Voucher.

We recognized acquired IPR&D and development milestones of $970.1 million in 2021 that included charges resulting from business development transactions with Foghorn, Rigel, and Precision.

See Note 3 to the consolidated financial statements for additional information.

We recognized asset impairment, restructuring, and other special charges of $316.1 million in 2021.

The charges were primarily related to an impairment of a contract-based intangible asset from our acquisition of Loxo, an intangible asset impairment resulting from the sale of the rights to Qbrexza, as well as acquisition and integration costs associated with the acquisition of Prevail.

In 2020, we recognized $131.2 million of asset impairment, restructuring, and other special charges primarily related to severance costs incurred as a result of actions taken worldwide to reduce our cost structure.

Other—net, (income) expense was expense of $201.6 million in 2021 compared to income of $1.17 billion in 2020, primarily driven by lower net investment gains on equity securities and a debt extinguishment loss of $405.2 million related to the repurchase of debt.

Our effective tax rate was 9.3 percent in 2021, compared with an effective tax rate of 14.3 percent in 2020, primarily driven by the tax impacts of acquired IPR&D charges, lower net investment gains on equity securities, as well as a net discrete tax benefit.

We recognized asset impairment, restructuring, and other special charges of $244.6 million in 2022, primarily related to an intangible asset impairment for GBA1 Gene Therapy (PR001) due to changes in estimated launch timing.

We recognized asset impairment, restructuring, and other special charges of $316.1 million in 2021, primarily related to an impairment of a contract-based intangible asset from our acquisition of Loxo, an intangible asset impairment resulting from the sale of the rights to Qbrexza, as well as acquisition and integration costs associated with the acquisition of Prevail.

Other—net, (income) expense was expense of $320.9 million in 2022, primarily driven by net investment losses on equity securities.

Other—net, (income) expense was expense of $201.6 million in 2021, primarily driven by a debt extinguishment loss of $405.2 million related to the repurchase of debt, partially offset by net investment gains on equity securities.

Our effective tax rate was 8.3 percent in 2022, reflecting the favorable tax impact of the implementation of a provision in the 2017 Tax Act that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022, partially offset by the tax impact of the mix of earnings in higher tax jurisdictions.

Our effective tax rate was 9.3 percent in 2021, reflecting the favorable tax impacts of acquired IPR&D and development milestone charges, net investment gains on equity securities, and a net discrete tax benefit.

Operating Results—2021

10 unchanged sentences

Our management continuously evaluates our liquidity and capital resources, including our access to external capital, to ensure we can adequately and efficiently finance our capital requirements.

As of December 31, 2021, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital equipment expenditures, dividends, repayment of outstanding borrowings, milestone and royalty payments, the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the 2017 Tax Act, leases, unfunded commitments to invest in venture capital funds, and retirement benefits (see Notes 11, 4, 14, 10, 7, and 15 to the consolidated financial statements).

We anticipate our cash requirements related to ordinary course purchases of goods and services and capital equipment expenditures will be consistent with our past levels relative to revenues.

Beginning in 2022, the 2017 Tax Act contains a provision that requires us to capitalize and amortize research and development expenses for tax purposes, whereas previously we could fully deduct these expenses in the year incurred.

See "Results of Operations - Executive Overview - Other Matters -Tax Matters" for additional information.

We plan to invest more than $1 billion over several years in a new facility in Concord, North Carolina to manufacture parenteral (injectable) products and devices.

We plan to invest more than 400 million euros over several years in a new facility in Limerick, Ireland to expand our manufacturing network for biologic active ingredients.

Cash and cash equivalents increased to $3.82 billion as of December 31, 2021, compared with $3.66 billion at December 31, 2020.

As of December 31, 2022, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital expenditures, dividends, repayment of outstanding borrowings, milestone and royalty payments, the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the 2017 Tax Act, leases, unfunded commitments to invest in venture capital funds, and retirement benefits (see Notes 11, 4, 14, 10, 7, and 15 to the consolidated financial statements).

We anticipate our cash requirements related to ordinary course purchases of goods and services will be consistent with our past levels relative to revenues.

In 2022, we committed to invest over several years more than $2 billion in two new facilities in Lebanon, Indiana to manufacture existing and future products, more than $1 billion in a new facility in Concord, North Carolina to manufacture parenteral (injectable) products and devices, and more than 400 million euro in a new facility in Limerick, Ireland to expand our manufacturing network for biologic active ingredients.

In early 2023, we committed to invest an additional $450 million to expand manufacturing capacity at Research Triangle Park facility in Durham, North Carolina for additional parenteral filling, device assembly, and packaging capacity.

These investments, and other capital investments that support our operations, will result in higher capital expenditures for the next several years.

The 2017 Tax Act contained a provision that requires us to capitalize and amortize research and development expenses for tax purposes starting in 2022, whereas previously we could fully deduct these expenses in the year incurred.

The implementation of this provision increased our cash payments of income taxes by approximately $1.20 billion in 2022.

While the implementation of this provision will continue to increase our cash payments of income taxes, the increase will moderately decrease from 2022 levels over the five-year amortization period.

See "—Executive Overview—Other Matters—Tax Matters" for additional information.

Cash and cash equivalents decreased to $2.07 billion as of December 31, 2022, compared with $3.82 billion at December 31, 2021.

Net cash provided by operating activities was $7.08 billion in 2022, compared with $7.26 billion in 2021.

2 unchanged sentences

See Note 7 to the consolidated financial statements for additional information.

The CVR entitles Prevail stockholders up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to certain terms and conditions.

This acquisition was funded primarily through cash on hand.

In December 2022, we acquired all shares of Akouos, Inc.

(Akouos) for a purchase price that included $12.50 per share in cash (or an aggregate of $327.2 million, net of cash acquired) plus one non-tradable contingent value right (CVR) per share.

The CVR entitles Akouos shareholders up to an additional $3.00 per share in cash (or an aggregate of approximately $122 million) payable, subject to certain terms and conditions, upon the achievement of certain specified milestones.

This acquisition was funded through cash on hand.

See Note 3 to the consolidated financial statements for additional information.

As of December 31, 2021, total debt was $16.88 billion, an increase of $289.4 million compared with $16.60 billion at December 31, 2020.

In September 2021, we issued euro-denominated notes consisting of €500.0 million of 1.125 percent fixed-rate notes due in September 2051 and €700.0 million of 1.375 percent fixed-rate notes due in September 2061, with interest to be paid annually, and British pound-denominated notes consisting of £250.0 million of 1.625 percent fixed-rate notes due in September 2043, with interest to be paid annually.

We paid $1.91 billion of the net cash proceeds from the offering to purchase and redeem certain higher interest rate U.S.

dollar-denominated notes with an aggregate principal amount of $1.50 billion.

We used the remaining net proceeds from the offering to prefund certain 2022 debt maturities and for general corporate purposes.

In addition, in September 2021, we issued euro-denominated notes consisting of €600.0 million of 0.50 percent fixed-rate notes due in September 2033, with interest to be paid annually.

The net proceeds from the offering will be used to fund, in whole or in part, eligible projects designed to advance one or more of our environmental, social, and governance objectives.

As of December 31, 2022, total debt was $16.24 billion, a decrease of $646.1 million compared with $16.88 billion at December 31, 2021.

See Note 11 to the consolidated financial statements for additional information.

1 unchanged sentence

See Note 11 to the consolidated financial statements for additional information.

We believe that amounts accessible through existing commercial paper markets should be adequate to fund any short-term borrowing needs.

For the 136 th consecutive year, we distributed dividends to our shareholders.

We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowing needs.

Dividends of $3.92 per share and $3.40 per share were paid in 2022 and 2021, respectively.

In the fourth quarter of 2021, effective for the dividend to be paid in the first quarter of 2022, the quarterly dividend was increased to $0.98 per share, resulting in an indicated annual rate for 2022 of $3.92 per share.

Capital expenditures of $1.31 billion during 2021, compared to $1.39 billion in 2020.

In 2021, we repurchased $1.00 billion of shares, which completed our $8.00 billion share repurchase program authorized in June 2018.

Additionally, our board authorized a $5.00 billion share repurchase program in May 2021.

In 2021, we repurchased $250.0 million of shares under the $5.00 billion share repurchase program.

As of December 31, 2021, we had $4.75 billion remaining under the $5.00 billion share repurchase program.

The quarterly dividend was increased to $1.13 per share effective for the dividend to be paid in the first quarter of 2023, resulting in an indicated annual rate for 2023 of $4.52 per share.

Capital expenditures were $1.85 billion during 2022, compared to $1.31 billion in 2021.

In 2022, we repurchased $1.50 billion of shares under our $5.00 billion share repurchase program authorized in May 2021.

As of December 31, 2022, we had $3.25 billion remaining under this program.

See Note 13 to the consolidated financial statements for additional information.

See "Results of Operations - Executive Overview - Other Matters - Patent Matters" for information regarding recent and upcoming losses of patent protection.

See "—Executive Overview—Other Matters—Patent Matters" for information regarding recent losses of patent protection.

Both domestically and abroad, we continue to monitor the potential impacts of the economic environment;

the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers;

the uncertain impact of health care legislation;

the uncertain impact of healthcare legislation;

and various international government funding levels.

In the normal course of business, our operations are exposed to fluctuations in interest rates, currency values, and fair values of equity securities.

These fluctuations can vary the costs of financing, investing, and operating.

These fluctuations impact the costs of financing, investing, and operating.

We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments.

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however, we are unlikely to cease development if the compound successfully achieves milestone objectives.

We also note that, from a business perspective, we view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.

We view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.

As we expand our manufacturing capacity in order to meet existing and expected demand of our incretin products, we have entered, and expect to continue to enter, into various agreements for contract manufacturing and for supply of materials.

The executed agreements could, under certain circumstances, require us to pay up to approximately $4.5 billion if we do not purchase specified amounts of goods or services over the durations of the agreements, which generally range from 2 to 8 years.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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Revenue Recognition and Sales Return, Rebate, and Discount Accruals

Background and Uncertainties

We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements.

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Significant judgments are required in making these estimates.

The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, chargeback, and patient assistance programs in the U.S.

In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing.

The largest of our sales rebate and discount amounts include rebates associated with sales covered by managed care, Medicare, Medicaid, and chargeback programs, as well as reductions in revenue related to our patient assistance programs, in the U.S.

In determining the appropriate accrual amount, we consider our historical rebate payments for these programs, as well as patient assistance program costs, by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing.

Refer to Note 2 to the consolidated financial statements for further information on revenue recognition and sales return, rebate, and discount accruals.

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Our sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet.

As of December 31, 2021, a 5 percent change in our consolidated sales return, rebate, and discount liability would have led to an approximate $366 million effect on our income before income taxes.

As of December 31, 2022, a 5 percent change in our consolidated sales return, rebate, and discount liability would result in a change in revenue of approximately $464 million.

The portion of our consolidated sales return, rebate, and discount liability resulting from sales of our products in the U.S.

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(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1 percent of consolidated revenue for each of the years presented.

Increase in reduction of net sales in 2022 was primarily driven by our incretin products due to increase in our patient assistance programs and in volume of rebates for managed care, Medicare and Medicaid programs.

Litigation Liabilities and Other Contingencies

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In addition, we accrue for certain liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage.

We accrue legal defense costs expected to be incurred in connection with significant liability contingencies when both probable and reasonably estimable.

We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance.

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To determine whether acquisitions or licensing transactions should be accounted for as a business combination or as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules.

If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values as of the acquisition date.

The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill.

If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to expense at the acquisition date, and goodwill is not recorded.

If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to acquired IPR&D and development milestones on our consolidated statement of operations at the acquisition date, and goodwill is not recorded.

See Note 3 to the consolidated financial statements for additional information.

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The fair values of intangible assets, including acquired IPR&D, are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by management.

Significant estimates and assumptions include, but are not limited to, probability of technical success, revenue growth and discount rate.

Significant estimates and assumptions include, but are not limited to, probability of technical success, revenue projections, and discount rate.

Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.

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Financial Statement Impact

As of December 31, 2021, a 5 percent change in the contingent consideration liability would result in a change in income before income taxes of $3.5 million.

As of December 31, 2022, a 5 percent change in the contingent consideration liabilities would result in a change in income before income taxes of $5.5 million.

Impairment of Indefinite-Lived and Long-Lived Assets

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We utilize the "income method," as described in Note 8 to the consolidated financial statements.

For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in "Results of Operations - Executive Overview - Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products.

For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in "—Executive Overview—Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products.

As such, it is likely that some acquired IPR&D assets will become impaired in the future.

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Background and Uncertainties

We prepare and file tax returns based upon our interpretation of tax laws and regulations, and we record estimates based upon these interpretations.

We file tax returns based upon our interpretation of tax laws and regulations, and we record estimates in our financial statements based upon these interpretations at the applicable tax rates in the jurisdictions in which we operate.

Our tax returns are routinely subject to examination by taxing authorities, which could result in future tax, interest, and penalty assessments.

Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation and regulation as concluded through the various jurisdictions' tax court systems.

Inherent uncertainties also exist in estimates of many tax positions due to the complexity of tax laws.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances.

For example, adjustments could result from changes to existing tax law, the issuance of regulations by taxing authorities, new information obtained during a tax examination, or resolution of a tax examination.

We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns.

The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances such as changes to existing tax law, the issuance of regulations by taxing authorities, new information obtained during a tax examination, or resolution of a tax examination.

We believe our estimates for uncertain tax positions are both appropriate and sufficient to pay assessments that may result from examinations of our tax returns.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis